December 2010

Vox takes its annual break between 25 December 2010 and 2 January 2011. This column documents the coevolution of VoxEU and the global economic crisis since June 2007. It also highlights a few columns that readers should read (or re-read) in preparation for the Eurozone’s next crisis.

The controversial decision to grant the 2022 FIFA World Cup to Qatar is set to provide the country with billions of dollars of revenue. This column argues that one overlooked consequence will be inflationary pressure and suggests “World Cup bonds”, among other tools, could help Qatar keep price rises in check.

Does corruption sand or grease the wheels of economic growth? This column reviews recent research that uses meta-analysis techniques to try to provide more concrete answers to this old-age question. From a unique, comprehensive data base of 460 estimates of the impact of corruption on growth from 41 studies, the main conclusion that emerges is that there is little support for the “greasing the wheels” hypothesis.

Trade in services is blighted by restrictive policy and is consequently one of the central issues in the Doha trade negotiations. Yet this column argues that even the best offers put forward are twice as restrictive as current policy and will generate no additional market openings. This column provides two proposals that aim to enhance the prospects of correcting this.

Menopause – or post-reproductive survival – is rare among mammals and, from an evolutionary perspective, anomalous since it reduces consumption for current offspring without producing future offspring. Aloysius Siow of the University of Toronto talks to Romesh Vaitilingam about his theory of menopause, which is based on the fact that, unlike other mammals, humans understand the reproductive process. The interview was recorded at the Centre for Market and Public Organisation in Bristol in October 2010. [Also read the transcript]

Many policymakers have reacted to both the financial crisis and the recent Eurozone sovereign debt problems as though they were unexpected. This column argues that we knew more than enough to anticipate both problems, that the evidence was easily accessible. The institutional and political weaknesses of the Eurozone were hardly a mystery.

Daily average foreign exchange market turnover reached $4 trillion in April 2010, 20% higher than in 2007. This column describes how recent growth is largely due to the increased trading activity of “other financial institutions”, which include high-frequency traders, banks trading as clients of the biggest dealers, and online trading by retail investors.

Environmentalists have long feared that globalisation will harm the environment by allowing heavily polluting industries to migrate to countries with lax environmental standards. This column presents new evidence from several industries across many countries for all the major pollutants. It suggests that lax policy has only had a small effect on the pollution content of trade.

The independent Global Trade Alert has identified hundreds of protectionist measures since its launch in 2008. This column argues that the protectionist measures are associated with substantial changes in bilateral trade flows. It adds that border measures and behind-the-border measures, including bailouts and subsidies, contribute equally to an annual aggregate trade distortion of at least $35 billion.

Capital flows to emerging markets are controversial territory. This column argues that they create externalities that make the recipient economies more vulnerable to financial fragility and crises. It adds that policymakers can make their economies better off by regulating and discouraging the use of risky forms of external finance – in particular short-term dollar-denominated debts.

Last week's meeting of the European Council were ushered in with optimism and the hope that Europe's leaders would take steps towards greater stability. This column argues that no such steps were taken, that there is really no change to the status quo, and that – under these conditions – the crisis is likely to fester indefinitely

There is broad agreement that research at universities has knock-on benefits for innovation and the wider economy in general. The question remains “how?”. This column presents evidence from across the UK suggesting that local university research has a positive effect on the number local small firms that patent and that this effect strengthens the better the university.

While politicians have hailed the bailouts of Greece and Ireland as necessary and responsible, there are many who feel that burdening taxpayers is grossly unfair. This column argues that Europe’s governments should lead a process of ruthless triage, recapitalisation, and restructuring of the region’s most important banks. It adds that while this will be extremely disruptive, the alternative may threaten the political fabric of the EU.

Today’s currency tensions are the result of a complex set of forces arising from the Great Recession. This column presents lessons from the break-up of the gold standard and of the fixed-rate dollar standard. While competitive devaluations are less likely today than is commonly feared, there is no room for complacency.

Lorenzo Bini-Smaghi – Member of the ECB's Executive Board – has produced a brilliant defence of the no-default strategy currently pursued by the Eurozone authorities. This column argues that instead of ruling out highly plausible outcomes, the ECB should explain how it will react if defaults happen. By not making adequate preparations, it may be raising the odds of a very bad scenario.

The growing power of Chinese trade is almost daily news. This column argues that China’s role in world trade today is shaped in part by the post-1978 market reforms and in part by the Western invasion in the 19th century. Following the Opium Wars, China was forced to open its borders, providing the bedrock of technology and infrastructure that supported its future growth.

Several countries have recently introduced gender quotas in hiring and promotion committees at universities. Evidence from promotions in the Spanish university system suggests that quotas are only effective at increasing the number of successful female applicants in promotions to top positions. This column argues that, given that sitting on committees reduces the available time for research, gender quotas should be implemented only for more senior academic positions.

How do banks and capital markets interact? This column brings together evidence to show that banks and capital markets, rather than simply being competitors, are in fact complements to each other – a finding that has implications for policy.

Governments globally face a healthcare bill of around $7 trillion – and set to rise. This column argues that the need to focus on productivity has never been greater. With data from 1,200 hospitals across seven of the world’s wealthiest countries, it suggests that improvements in hospital management practices can help bring about improvements in hospital productivity as well.

Robert Townsend talks about his recent book, co-authored with Krislert Samphantharak, that analyses household finance in developing countries using integrated household surveys. Townsend describes how to create new and more comprehensive household ‘accounts’, and use them to analyse productivity, capital structure and liquidity in households. The interview was recorded in London in November 2010. [Also read the transcript]

The recent proposal by Luxembourg’s prime minister Jean-Claude Juncker and the Italian finance minister, Giulio Tremonti to provide European governments with Eurobonds has sparked debate. According to this column, it will help through financing infrastructure and increasing market liquidity. But because it requires highly-indebted countries to surrender a large chunk of fiscal sovereignty, it is a good idea whose time has not yet come.

Today the European Council meets to discuss a new package on economic governance. While this column praises the proposal’s acknowledgement of the dangers associated with external imbalances as well as fiscal imbalances, it is concerned about the approach to public and private debt, in particular the apparent weak stance towards the Stability and Growth Pact. Lessons from the Eurozone crisis do not appear to be learned.

At a time when many people are asking themselves what to give their friends and family for Christmas, this column asks why we bother to give anything at all. In the economic laboratory, subjects exhibit significant levels of altruistic giving and aversion to unfairness. Outside the laboratory however, we encounter vast amounts of poverty and inequality and yet only give a tiny fraction of our income to charity.

Jean-Claude Juncker and Giulio Tremonti have recently proposed the creation of a European Debt Agency that would enable each EU country able to issue “European bonds” of up to 40% of GDP. This column argues that while the proposal is a brilliant piece of economic reengineering in favour of the Eurozone creditor countries, especially Germany and France, cooperation would be better for all.

The multilateral trading system of the GATT and WTO is rapidly being replaced by a system dominated by preferential trade agreements. This column argues that this new system is complex in nature and provides a novel assessment of the implications for signatory countries and third parties.

Brain drain can be a good thing for the source country; one benefit is that some skilled workers eventually return. Unfortunately, there is little evidence on the incidence and nature of such return migration. This column presents new data on the return-migration decisions of foreign faculty based in US chemistry departments.

Are concerns over the sustainability of sovereign debt in Europe justified? This column presents data covering 16 developed countries including Greece, Italy, Portugal, and Spain. It shows that these countries have worryingly low levels of human capital and income per head and argues that policymakers in these countries should press ahead with reforms to reassure investors of their future growth potential.

Are global imbalances sustainable? This column analyses nearly 160 current-account reversals across 101 countries between 1971 and 2007. It argues that with the right policy framework, external imbalances can be monitored and, to some extent, managed.

Autumn 2008 was calamitous for global equities. This column presents data on stock returns from over 17,000 firms in 44 countries suggesting that the decline in share prices was associated with three separate and identifiable “shock factors”: the fall in global demand, the contraction of credit supply, and the selling pressure on equity as investors were forced to unload some of their holdings.

Do skill-intensive imports from rich nations reduce skill accumulation in emerging economies? This column presents new evidence from 41 emerging economies to suggest that being close to the global supply of skilled labour decreases domestic human capital. A one-standard deviation higher geographic proximity to skilled labour is associated with a 12% lower average education length of the country’s workforce. This may have profound consequences for the ability of poorer nations to catch up with richer ones.

Nightmares of the Eurozone are back to haunt policymakers. This column senses something surreal. The leaders scramble to prevent disaster at the last minute, only to be seen the next minute reverting back to the behaviour that brought them to the edge of despair in the first place. It argues that the Eurozone may be more in need of a psychiatrist than a financial guru.

Robert Townsend of MIT talks about his research on how the lives of the world’s poor can be improved through more efficient financial systems. Drawing on data gathered from an extensive survey of Thai households, Townsend discusses risk-sharing and the importance of networks, the rate of saving and return on assets, and villages as small, open economies. The interview was recorded in London in November 2010. [Also read the transcript]

Barely 20% of European patents are validated in smaller EU member states – and this share is falling. This column argues that low validation rates are problematic for two reasons. They shelter firms from technological competition and they make a country less attractive to foreign innovators. It concludes that the introduction of the EU patent would solve these issues.

If China appreciates its currency, who will gain and who will lose out? This column argues that the single greatest beneficiary from a gradual renminbi revaluation, accompanied by measures to stimulate demand, will be China itself. Ironically, the US, which has been leading the charge on renminbi appreciation, would likely be among the losers. Certainly, a very large one-off revaluation that disrupts China’s growth hurts everyone.

Croatia and Latvia both gained independence in the early 1990s. This column tracks their progress since. It shows that the two are growing but at different rates and with varying cycles. It argues that investment in human capital, good governance, and institutional reform have been vital for development and while Latvia is catching up, Croatia remains the more efficient and wealthier of the two.

Last month, the US Federal Reserve announced a new quantitative easing programme, in which it will inject money into the economy by buying up to $600 billion in long-term government bonds. This column argues that now is not the time to be buying back long-term debt. Given exceptionally low long-term rates, the US government should be issuing it instead.

The unfolding crisis in Europe has focused policymakers’ attention on reducing debt-to-GDP ratios. This open letter to the President of the European Council argues that, while the top part of that fraction is important, the most critical factor in the long run is the restoration of GDP growth – offering several policy recommendations to this end.

Muddling through isn’t working. This column argues that troubled Eurozone nations should simultaneously open restructuring talks while continuing to service their debts normally. Germany, France, and other core Eurozone nations would have to stand ready to recapitalise the banks most exposed to the restructured debt. The ECB would then stabilise the banking system and the EFSF would stabilise sovereign debt. This big bang could be prepared in a weekend; the market already seems to be pricing it in.

Despite its large size relative to the small Irish economy, last weekend’s bailout is not working. Risk premiums continue to rise. This column argues that part of the problem lies in a seemingly innocuous provision in the rescue facility that is to replace the current European Financial Stability Facility in 2013. The argument is tricky, but the heart of the problem is the insistence that rescue financing be senior to private debt while simultaneously ruling out rescheduling of short-term debt.

Over the past two decades, Western European trade has become increasingly integrated with emerging economies. This column uses a novel empirical technique to show that import competition from East Asian low-wage countries – in particular China – has dampened inflation in five Western European nations. Increased integration with Turkey and Central and Eastern Europe, meanwhile, has had little effect on inflation.

What factors determined the fiscal expansion seen in many developed countries in 2009? This column finds that greater de facto fiscal space prior to the global crisis, higher GDP per capita, more financial exposure to the US, and lower trade openness were all associated with a larger fiscal stimulus relative to GDP and that more open economies may have relied more on exchange-rate depreciation.

Irish interest spreads did not fall and contagion continues. Here one of the world’s leading international economists explains why. Short-sighted, wishful thinking by EU and German leadership designed a package that is not economically feasible in the long run (it would trigger a vicious debt deflation spiral) and it is not politically sustainable in the short run. The Eurozone had better have a Plan B for when the new Irish government rejects the package next year and imposes a haircut on Irish bank bondholders.

The Eurozone crisis is not over. This column argues that the bailout of Greece and the €750 billion Special Purpose Vehicle set up in May 2010 was the first step down the slippery slope. The first and only possible remedy is to reconstruct the no-bailout clause and let markets discipline governments; the EU has proven that it cannot.

Politicians, public servants, and commentators have been queuing up in recent months to raise their concerns about global imbalances, particularly the China-US imbalance. This column argues that while the two economies may present opposing public stances, they are quietly playing a tango that neither can step out of.

Women in many countries face legal barriers preventing them from inheriting property. This column argues that this is a starting place for broader gender inequality and that stronger inheritance rights for women are likely to be an effective mechanism for improving their access to physical and human capital.

John Quiggin of the University of Queensland talks to Viv Davies about his recently published book, which describes some of the economic ideas that he believes played a role in creating the global financial crisis. He refers to the Great Moderation, the efficient markets hypothesis, DSGE, ‘trickle-down’ economics and privatisation as ‘zombie’ ideas, which should have been killed off by the financial crisis, yet for some reason still live on in the minds of many economists and policy-makers. The interview was recorded in London in November 2010. [Also read the transcript]

Does private competition work in the schooling sector? This column presents evidence that countries with more privately operated schools perform substantially better on international tests of student achievement. To isolate the causal effect of private competition, the column focuses on variation in private school shares that has deep historical roots – Catholic opposition to state-run education systems in the 19th century.

The global imbalances debate regularly singles out China as the champion of exporting countries, often neglecting the role of Germany. This column argues that if Germany does not adjust, it will keep dragging down EU growth. Europe’s other countries, for their part, should silence their rhetoric on manufacturing and go back to focusing on the service sector.

Banks and capital markets are often viewed as competitors within the financial system, with some suggesting that each develops at the expense of the other. This column argues that banks and markets exhibit three forms of interaction. They compete, they complement each other, and they coevolve.

The Irish bailout failed to stem contagion in the Eurozone. This column argues that the root cause was the separation of monetary policy (ECB) and fiscal policy (member states). If European authorities are unwilling to suspend this separation, the contagion will spread.

Bailing out banks has put severe pressure on government finances, particularly in the Eurozone. This column compares 10 EU governments’ explicit bailout commitments with their expected liabilities. It shows that the Irish government’s commitments are an outlier. Faced with a systemic crisis, financial assistance from international institutions is unavoidable.

How do cities develop and grow? This column presents historical data from a large number of cities in several countries. It finds that there are a few cities that grow much faster than the rest; the first cities to grow quickly are the largest; and this pattern of sequential city growth is more pronounced in periods of rapid growth in urban population.